Previously we discussed why you definitely want to get pre-approved before you start looking for homes, but here we’re going to dive a little deeper and tell you exactly how your bank/credit union determines your pre-approval amount.
HOW A LENDER PRE-APPROVES YOU
- Credit Score
- First off is your credit score. Most people have heard of this, but may not know what it is! Simply put your credit score is a measure of your financial health, and shows lenders how risky it may be to lend you money.
- If your credit score is between 680 and 900, you’ll qualify for a mortgage with what’s called an “A” level lender, such as a major bank or credit union. A lenders offer the best rates.
- If you credit score is between 600-680 – then an “A” lender is less likely to approve you
- If your credit score is UNDER 600 then you will only qualify for what’s called a “B” lender – which means you’ll likely be paying a higher rate.
- Down Payment
- Your down payment is the lump sum of money you’ll put towards the purchase of your home. In Canada, the minimum down payment you must make is 5% of the home’s purchase price.
- If you put down anything less than 20% however, you’ll have to buy mortgage insurance to protect your lender in case you default on your loan.
- The size of your down payment affects how much you can borrow. For example, if you wanted to buy a home worth $300,000, you would need at least a $15,000 down payment: $300,000 x 5% = $15,000
- As of February 15th 2016, the minimum down payment is higher for homes sold for $500,000 – $999,999. You now need to put down 5% of the first $500,000, and 10% of any amount over $500,000.
- For example, a house worth $600,000 would require a down payment of at least $35,000: ($500,000 x 5% = $25,000) + ($100,000 x 10% = $10,000) = $35,000
- Debt Service Ratios
Your debt service ratios are two calculations that lenders use to determine the largest monthly mortgage payment you can afford,
It’s essentially based on 2 things:
- your current monthly income
- your monthly expenses and current debt
Lenders use these ratios to make sure you can afford to make your monthly mortgage payments
- Supporting Documentation
Depending on the mortgage broker or lender you sit down with, the documentation you’ll need to submit for your pre-approval may vary.
For example, some brokers require proof of income for a pre-approval, while others don’t require proof until your offer has been accepted and you need to finalize your mortgage application.
Here is a list of documentation you may need to provide for your mortgage pre-approval:
- Proof of income (pay stubs and letter from your employer, or a notice of assessment if you are self employed)
- Length of time with employer
- Proof of down payment and ability to pay closing costs (recent financial statements of bank accounts and investments)
- Proof of any other assets like a car, cottage or boat
- Information about other debts including:
- Credit cards or lines of credit
- Spousal or child support payments
- Student loans
- Car leases or loans
- Personal loans
So as you can see there are many factors to consider when getting pre-approved so our best advice is to simply call your mortgage broker or bank and get this process done as early as possible in the buying process.
If you need any help with getting a pre-approval our team can actually get you pre-approved in-house to make things even easier.
Hope you found this video helpful and if you have any questions or feedback we’d love to hear from you.